Wednesday, April 16, 2014

Silver and Gold Miners Still Disappoint

By: P_Radomski_CFA

Briefly: In our opinion speculative short positions (full) in gold, silver, and mining stocks are justified from the risk/reward perspective.

Yesterday, we emphasized that the situation in the mining stock sector was bearish. We wrote the following:

One could argue that the general stock market also declined and it was this factor that caused the decline in miners. Yes, stocks declined overall, but if the mining stocks and precious metals sector in general wasn’t weak and about to decline anyway, miners would have not responded as decisively as they did. Miners underperformed gold once again on Friday and the short positions that we opened last week are already profitable.

The general stock market moved higher on Monday and so did gold. Did miners rally? Let’s take a look (charts courtesy of

Miners moved just a little higher. They barely erased Friday’s declines and did so on relatively low volume. This is bearish daily action and if we take the last 3 trading days into account, we also get bearish implications. The reason is that overall gold moved higher, while mining stocks declined on average.

Before we move to gold, let’s examine the silver market.

The SLV ETF moved just a little higher yesterday (the move is almost non-existent) and the move happened on very low volume. There’s not much to comment on other than silver is “back to normal” meaning that it’s underperforming gold, just like it used to in the previous weeks (with the exception of Thursday’s rally which we found to be bearish anyway).

Gold itself moved on Monday, but – once again – the corresponding volume was relatively low and this makes us think that the next downturn is just around the corner. The thing that might appear bullish at this time is that gold managed to rally despite a move higher in the USD Index. It’s not really the case in our view because of 2 reasons:

  1. Gold responded to the euro’s weakness rather than dollar’s strength. That’s simply a likely result of comments from Mario Draghi, who said that the strengthening of the exchange rate [of the euro] would require further monetary policy accommodation. At this time it’s nothing more than a comment, perhaps one made to lower the value of the euro right away. It worked, but it doesn’t need to have implications going forward – at least not necessarily for gold.
  2. There have been many times when the precious metals’ reaction to US dollar’s strength was simply delayed, not absent – this could be the case also this time.

Gold’s move higher is also small given the fact that the situation in Ukraine remains very tense – gold is not reacting with the strength one might have expected to see.

When we take a look at the price of gold relative to other commodities, we’ll see that its recent move higher has been very poor and that it’s been declining since the beginning of the year with only a few moves higher. The above chart is one of the reasons for which we think the medium term trend for the precious metals sector is still down and that the final bottom has not yet been reached.

To summarize:

Trading capital (our opinion): speculative short positions (full) in gold, silver, and mining stocks. You will find our take on many trading vehicles in our Precious Metals ETF Ranking.

Stop-loss orders:

- Gold: $1,353
- Silver: $20.86
- GDX ETF: $26.2

Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position

You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.

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